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ECONOMICS 11TOPIC 13

MONEY

U-PRIMO E. RODRIGUEZDept. of Econ., UPLB

SignificanceSome of the more controversial economic issues involve the conduct of monetary policy as it is used to deal with inflation, budget deficits, unemployment, incomes, international economic relationships, etc. Monetary policy has profound effects on our jobs, incomes, livelihood, and career choices.This lesson, therefore, introduces the role and functions of money in the economic system

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The Road Aheadevolution of money and modern payment systems basic insights as to why people and firms hold money (demand for money). money supply

Definition of Money

Economists have not really agreed on a single

definition but they agree that money supply

refers to all things generally acceptable in

payment of debt (store of value) and as payment

for goods and services (medium of exchange)

whatever its legal status may be.

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Functions of Money

Money serves a medium of exchange.

This means that money is an accepted means of payment for goods and services.

Functions of Money (cont…)Money serves as a unit of account –Money represents an item with which the values of all other goods and services are expressed or quoted.

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Functions of Money (cont..)Money serves as a store of value (and a standard of deferred payment).

Money can be kept today (i.e., stored) and spent at a later period. It also implies that goods can be bought today and paid for at a later date (deferred payment).However inflation, may decreases the ability of money to act as a store of value and deferred payment.

Evolution of MoneyAutarky refers to a family or tribal group, which, in the absence of trade, produces that level of goods and services equal to their consumption. Money is not used.

Barter system involves trading of goods and services for other goods and services. Money is not used but the barter system requires a double coincidence of wants.

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Evolution of Money (cont…)Commodity Money - overcame the inconveniences that went with barter system by using uncoined metals like gold, silver or copper.

had the advantage of ease of transport and durability. new set of problems came up with the use of uncoined metals such as adulteration (impurities in content) and short weighing by unscrupulous traders.

Evolution of Money

Coinage solved the problem of adulteration and short weighing, with the king's seal being stamped on the metals for authentication. However, some more problems came up like storage, theft, costly and risky transport, and so on.

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Evolution of MoneyIOU's tend to minimize risk in transport since coins were left to a reputable person with "vault or safekeeping" means. IOU's ("I owe you") were simply written on paper/receipt instead of going to the safekeeper to transact.Bank note involves the promise to pay a debt (IOU) which is evidenced by a piece of paper backed by specie.Specialized Bankers evolved because it was observed that not all people who "deposited" their money were demanding payment at the same time. Hence, there was no need to hold all the gold/silver pieces all the time. The idea of lending out a portion of the entrusted money for a fee while holding on to the rest for safe-keeping paved the way for fractional reserve banking.Electronic Funds Transfer System (EFTS)- Electronic money make use of computer terminals for transactions and automated computer clearing house that does away with a physical medium of exchange.

Demand for Money – Why to people hold money?

Transactions demand

for money

Precautionary demand

for money

Speculative demand

for money

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Transactions Demand for Money -arises from the need of households and firms to have money for the regular payments of goods and services

Precautionary Demand for Money –People want to hold money for unexpected events

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Speculative or Portfolio Allocation Motive

the speculative demand stems from the preference of households and firms to hold other assets that are "perfectly liquid and perfectly free from risk of depreciation in terms of money" in order to "take advantage of market movements."

Demand for MoneyDemand for money is primarily determined by the level of real output or income and the interest rate. Other factors:

(a) credit availability and affordability; (b) expectations on future income; (c) expectations on prices; (d) risk and expected returns on alternative assets; and (e) financial innovations that allow easy movement of funds from less liquid to more liquid forms.

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Supply of MoneyM1 consists of items used as medium of exchange

such as currency or coins in circulation and demand

deposits.

M2 consists of M1, plus savings and small time

deposits.

M2=M1+Savings &

small time

deposits

M3 refers to money supply, peso savings,

negotiable order of withdrawals (NOW accounts),

time deposits and deposit substitutes of money-

generating banks.

RM or reserve money represents liabilities of the

Bangko Sentral ng Pilipinas (Central Bank) to the

public sector in the form of currency in circulation

and to the banking sector inthe form of cash

reserves.

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Adios!!!WAKAS